Bond Market on Brink of Collapse

By bailing out bankers, brokers and CEOs, Washington has created the most dangerous bubble so far: the enormous and rapidly growing explosion of federal debt — U.S. treasuries — dumped on investors worldwide. You don’t need a PhD in economics to know what’s next. Like the tech bubble and real estate bubble that preceded it, this new bubble will also burst, wiping out trillions more dollars of invested wealth. Words: 770

In further edited excerpts from the original article* Martin D. Weiss (www.uncommonwisdom.com) goes on to say:

There are 3 compelling reasons long-term bond prices MUST crash:

Reason #1: Exploding Federal Deficits
The 2009 budget deficit of $1.4 trillion was the worst in history — more than three times larger than the previous record and the Congressional Budget Office (CBO) has projected that, rather than shrinking, the 2010 deficit will be $1.4 trillion. Worse, Washington will sink a total of $7.4 TRILLION deeper in debt over the next ten years.

The White House’s Office of Management and Budget (OMB) quickly disagreed, pegging the 2010 deficit at $1.6 trillion and promising an $8.5 trillion gusher of red ink over the next decade.

The New York Times quickly chimed in, pointing out that about 80 percent of the government’s deficit forecasts over the past three decades were too optimistic. In fact, just two years ago, the CBO said the 2010 deficit would be $241 billion. Now it’s likely to be at least $1.6 TRILLION — or over SIX TIMES MORE. Imagine if the government’s current ten-year debt estimates — already over $8 trillion — turn out to be equally far off-target! Of course, that would be impossible. Bond investors would simply stop lending Washington money long before that could happen.

Reason #2: An Explosion in the Supply of U.S. Treasury Bonds
It would be bad enough if Washington only had to borrow enough to equal each year’s budget deficits but Washington also has to borrow enough to replace Treasuries that are maturing — and that means an even greater avalanche of Treasuries need to find buyers each year.

Total issuance of government debt hit a stunning $922 billion in 2008 and then surged even higher to $2.1 trillion in 2009, and it’s on track to top $2.5 trillion this year. The size of just ONE WEEK’s debt auction has ballooned to almost $120 billion — more than the total supply hitting the market in a FULL year not long ago.

The laws of supply and demand dictate that when you get a massive increase in the supply of anything, its value plunges — and Treasury bonds are no exception.

Reason #3: Global Investors Starting to Rebel
So far, given the realities above, the U.S. treasury market has proven to be remarkably resilient because, in the global competition for investor funds, U.S. Treasuries are typically viewed as the “least ugly” alternative for many investors. That is why, so far, most foreign investors — now holding about 60 percent of all marketable U.S. Treasuries — have been willing to pay a relatively higher price for them and accept lower yields but now even that is changing! China, the single largest holder of U.S. debt, recently dumped more Treasuries than in ANY month since the government started tracking the data in 2000. The 30-year auction was especially pathetic. Indirect bidders — mostly foreign governments and investors — took down just 28.5 percent of the bonds sold, compared to a ten-auction average of 43.2 percent percent. Prices slumped and yields surged as a result. In effect, the U.S. Treasury had to bribe investors with higher yields to get them to buy.

Immediately alarm bells began ringing at the Fed. [In mid-February] the U.S. Federal Reserve raised the discount rate on loans made directly to banks by 25-basis-point increase which was the FIRST hike in the discount rate since early 2006.

Secretly, the Fed is in a panic to ward off a bond market collapse! They know that, sooner or later, they MUST send the message that they’re serious about cutting back on their mad money printing. The danger of course, is that foreign investors will get an entirely different message: that Washington’s efforts to fight the most severe recession since the Great Depression are waning. If that happens, you could see turmoil — not just in the bond market, but in every asset class imaginable.

*http://www.uncommonwisdomdaily.com/on-the-brink-of-a-bond-market-apocalypse-3-8479 (Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets.)

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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